The Revenge of Competitive Markets and the Big Shift in Energy Economics

The economy, jobs and the debate over the direction of the country dominate 2012 political campaigns. Nowhere is the political rhetoric fiercer than on energy issues.

Today there is wave after wave of new Federal regulation designed to favor clean energy strategies at the expense of fossil fuels that still provide most of our energy resources. There is broad public support for environmental quality but we see Federal energy industrial policy as hugely expensive, highly disruptive with spotty results.

Meanwhile, over the same period we saw phenomenal growth in domestic oil and natural gas production made possible by the disruptive innovation technologies horizontal drilling and hydraulic fracturing in unlocking the economic value of previously uneconomic energy supplies. The results of this big shift energy transformation are clear and measurable. The volume of domestic oil and gas production is growing. The price for natural gas has been completely decoupled from oil prices. Domestic natural gas prices are near historic lows. The expectation that the US was running out of natural gas and must import LNG to make up the difference has been turned completely on its head. Supply production now exceeds domestic demand and by 2011 the US began to export natural gas and was beginning to rationalize the energy pipeline infrastructure for both oil and gas to bring supply from the shale basins to the Gulf coast storage, liquids processing and refining infrastructure and enable exports of oil and LNG from these new sources. Step by step, state by state the private energy industry isn’t waiting for the government to act because there is opportunity, jobs, business growth and profits on the line and shareholders expect business to pursue them.

The contrast between the public sector and private sector energy strategy results is evidence of the big shift taking place all across America. If anyone thought America’s best days are behind us, take a look at the genius of America at work today. America is reinventing itself again. The combination of the drive to get our economy growing and get America back to work is converging with new technology and the entrepreneurial spirit of private enterprise.

Domestic Energy Production Growth is leading America back to Work

Over the past five years, the US private sector has produced more than 96 percent of the increase in domestic oil production on private and state lands according to the Institute for Energy Research. While more than two trillion barrels of oil are estimated to be recoverable from Federal lands, the policies and regulations in place by the Federal Government has actually resulted in a decrease in energy production on Federal lands.

Why did the private sector account for such a huge percentage of this growth? Because America still believes in private property rights including the right of land owners to benefit from the mineral resources their property contains. So energy producers avoided the Federal government by working with private property owners and states to develop domestic energy resources that helped the states create jobs, increase tax revenue, and put more money into the pockets and bank accounts of the private sector. Those revenues and profits are rippling through the economy. That is why North Dakota has an unemployment rate of about 4% compared to a national average twice that.

The inconvenient truth in this growth of domestic energy production is the realization that the decline and fall of fossil fuels is not inevitable. Despite the waves of onerous new Federal regulations on coal in pursuit, the private sector has adapted profoundly changing the economics of fossil fuels driving down the price of cleaner natural gas and exporting unused coal production. The irony in this is low natural gas prices are more ruthlessly efficient at undermining the economics of coal fired generation than all of the US EPA rules combined. But low natural gas prices are an equal opportunity competitor forcing nuclear power and renewable energy to also compete with grid parity natural gas prices for a place in the energy food chain.

The big shift is that low natural gas prices force a de facto compromise in the long battle to define a clean energy policy for America. Natural gas is 40% cleaner than coal and expanding its use produces substantial environmental benefits over coal at a fraction of the cost of all the EPA regulations, litigation and political infighting.

Low natural gas prices also go a long way toward restoring America’s economic competitiveness in manufacturing, in chemicals, and job creation made possible by repatriating outsourced production driven out of the country by high energy costs. To realize this revival in manufacturing and production in the private sector, the Federal Government must fix the problems in our corporate tax rates that make the US the highest corporate tax rate in the world and remove the tax barriers to repatriating earnings that now confiscate 35% of the revenue brought home.

But too much dependence upon natural gas is risky business. While today we have natural gas prices below $3 per MMBTU it was not long ago that gas prices were above $13 per MMBTU. Indeed, natural gas prices are among the most volatile of the world’s commodity prices. The way to avoid getting hurt by fuel price volatility is to diversify. That is why we need baseload coal and nuclear. That is why we need rooftop solar and wind energy. That is why we need strong markets for energy efficiency and demand response.

The private markets are searching for energy equilibrium—that sweet spot in the market that assures high reliability of energy supply, the cleanest practicable balance of fuels and resources, at the lowest possible price. Low energy prices are one big advantage for America’s economic recovery but they are not the only advantage of our tradition of reinventing America to adapt to changing times.

Disruptive Innovation Technology is our friend—just as horizontal drilling, hydraulic fracturing and other disruptive innovation technologies are helping to transform America’s energy value chain, information technology and operations technology are converging into strategies, applications and best practices to streamline and optimize the way America does business.

Instead of trying to pick winners and losers, the Government should create a competitive marketplace with fair rules, no subsidies and turn the private sector loose. The genius of America is our ability to continuously reinvent ourselves to adapt to change. The failure of government is impeding that disruptive innovative change. The 2012 election campaign question is which candidate is better able to unleash the genius of America once again—and then get out of the way!